Finanse, Rynki Finansowe, Ubezpieczenia nr 1/2016 (79)

DOI: 10.18276/frfu.2016.79-01 s. 13–26

The Importance of Financial Ratios

in Predicting Stock Price Trends:
A Case Study in Emerging Markets
Thomas Arkan*

Abstract: The purpose of this article is to investigate the importance of financial ratios derived from finan­
cial statements to predict stock price trends in emerging markets. A statistical examination to the prediction
power of 12 financial ratios was tested depending on data of 15 companies distributed on 3 sectors for the
years 2005–2014 in the Kuwaiti financial market. An equation to estimate the stock price in each sector was
built according to the multiple regression model after eliminating non-effective variables with the STEP­
WISE method. The results showed that some ratios could give strong positive and significant relationships
to stock price behaviour and trends, the most effective ratios on the stock price for the industrial sector are
ROA, ROE and net profit ratio. Also the most effective ratio on the stock price for the service sector was the
ROA, ROE, P/E and EPS ratio and the same for the investment sector. This study concluded that it could rely
on a set of financial ratios for each sector to predict stock price, the decision maker of such investors can rely
on the financial analysis presented by the financial ratios when making financial and operational decisions.

Keywords: financial ratios, stock price

Introduction and literature review

The Primary aim of financial reporting is to provide information about the financial posi-
tion and performance of companies provided by numbers disclosed in financial statements
which was considered to be a guide for their decisions. The Users of accounting information
in order to evaluate and forecast the profitability, equity growth, cash flow and dividends
of corporates’ economic and subsequent decisions, they rely more than any other informa-
tion on data arising out of financial statements or its components. Numbers in financial
reporting could affect investor confidence in financial markets. Investors are looking for
opportunities to invest additional resources in the most efficient capital markets and one of
the main factors that every investor has in making his/her decision is to give special atten-
tion to “stock price”.
It is known that financial ratios are the oldest and simplest practical tools in evaluating
and planning companies’ performance. They appeared in the mid nineteenth century, and

* 
Thomas Arkan, University of Szczecin, Department of Economics, e-mail: danmarkkbh@yahoo.com.
14 Thomas Arkan

it was always used by accountants and financial analysts. Financial ratios were used by
internal and external users for making their economic decisions; including investing, and
performance evaluation decisions. Many financial and accounting models have been devel-
oped over the past few decades. However, the financial ratios still kept their classical and
fundamental power as models or as another important supportive analysis for financial and
planning analysis.
The use of accounting data and financial ratios to explain changes in stock prices is fre-
quently referred to in the literature, using a financial ratio analysis can be largely attributed
to changes in stock prices has often been discussed by academics and financial analysts.
Kendall (1953) observes that stock prices seem to change randomly over time, and he
tested whether a previous price could be used to predict a future price change.
Later, studies expanded to include other predictive variables such as dividend yield,
price to earnings ratio, book-to market ratio, return on equity, and various measures of in-
terest rates that commonly tested to predict stock prices and returns. However, the evidence
is mixed.
Ball and Brown (1968) originally researched the correlation between accounting infor-
mation and stock price. After they empirically studied the correlation between annual report
earnings data and stock price, they found that if a company had excess earnings and then
investors could get an abnormal return. This shows the relationship between accounting
earnings and stock price.
Beaver asserted from another perspective that a company’s financial reporting and ac-
counting information could influence stock price. Beaver found that investors used the de-
clared accounting information when they traded in stocks.
Bernard and Stober, Dechow (1994) and Sloan (1996) respectively empirically studied
the influence of earnings information and operating cash flow information on stock price.
They found that the earnings information is better correlative, but not absolute.
Wright, Ken (1996) in their study entitled: “The role and importance of accounting infor-
mation when making decisions in the stock.” The study examined the role and importance
of accounting information when making decisions in securities in order to raise awareness
of the behaviour of investors.
Torpedo (2001) in his study determined the predictability of the profitability of compa-
nies in the Stock Exchange using their financial ratios. In his own research, he concludes
that a financial ratio analysis can have a high correlation with profitability and predictability
by multiple regression financial ratios, including a profitability test contract. The companies
with low and high profitability were divided into two groups and the results of his research
indicate a high potential for profitability in the projected financial ratios.
Long Chen (2007) investigated the factors affecting the stock price and amount an inves-
tor would pay to buy, and the results suggest that the most impact factor on stock prices is
cash flow.
 The Importance of Financial Ratios in Predicting Stock Price Trends... 15

Syed (2010) studied the relationship between financial ratios and stock prices in the me-
tallic and non-metallic minerals industry. The results indicate that the linear and non-linear
relationship between financial ratios and stock prices and the models of type B (without
interception) offer a greater ability to explain the stock price. Quadric nonlinear models are
better than the other models which cannot explain the stock price. The proportion of activity
in the circulation and Profitability ROA, return on capital and the percentage of non-profit
special sales can better explain the stock price

1. The concepts of financial Ratios and Analysis

The main objective of a financial a report is to provide information on a company’s perfor-
mance to the internal and external users to take decisions. From the perspective of informa-
tion economics, accounting and financial reporting play a vital role in an efficient capital
market.
One of the most common ways of assessing the relative values of stocks among prac-
titioners is to compare the numbers listed in financial statements by using financial ra-
tios. The main advantage of using financial ratios instead of amounts from the income state-
ment is that they are independent of the size of the company. The comparison of financial
ratios is used to assess companies’ financial condition, operations and attractiveness as an
investment. Based on their characteristics academics have already been studying financial
ratios widely for almost a century.
Financial ratios defined as the numerical value created from two or more values taken
from a company’s financial statements i.e. its balance sheet, income statement or statement
of cash flow. Typically, financial ratios are presented as a quantified metric in the form of
a percentage, multiple or a ratio which aims to evaluate the financial, operational perfor-
mance and competitiveness of a company.
Matar (2010) defines the financial analysis as “a process by which exploration or deriva-
tion group of quantitative and qualitative indicators of economic activity around the project
contributes to determine the significance of the properties of the activities of the operations
and financial position, in order to use these indicators in assessing the performance of the
companies with a view to making decisions”.
While Momani believes that financial analysis is a “detailed study of the financial re-
ports in order to identify the strengths and weaknesses of companies in these accounts and
diagnose problems in order to find solutions and by studying the historical information to
determine past and future Orientalism”.
The financial Ratio Analysis has been developed over many years and it has become
more than a tool of evaluation. It helps tax department’s credit analysis in banks, financial
market councils and CPA Accountants to determine some critical points in their jobs.
16 Thomas Arkan

The wide use of this ratio is growing because it is easy to calculate financial ratios, and
for being a quantitative measure to judge the internal units, also the financial ratios provide
basic indicators for judging performance without the need to provide some financial details.
In general, the extent and depth of financial statement analysis is determined by user re-
quirements, On the other hand an analyst about to make a decision whether to invest in a firm
is interested in its future performance. The technique involves the calculation of a number
of ratio indicators which attempt to express the relationships which exist between key fi-
nancial variables which appear principally in the published financial statements. The values
for individual ratios are then compared with an appropriate standard to ascertain whether
they are satisfactory or otherwise. Three main types of comparisons are widely employed:
(1) Cross sectional comparison:
(a) intra-industry – then the subject firm is compared with other firms in the same indu-
stry. The industry average for each ratio is the standard employed.
(b) Inter-industry – the subject firm is compared with other firms in different industries,
and the results of other firms or the averages of other industries are the standards em-
ployed. This approach is fraught with difficulty since the differing risk structures of
industries make unadjusted raw results difficult to compare.
(2) Intertemporal comparison – intra-firm – the subject firm’s ratios are compared across
time for the identification of trends or other relationships.
(3) Arbitrary standards comparison – ratios of the subject firm are rated against “tradi-
tional” standards.
I developed a chart to show the recent development of financial ratios analysis and fac-
tors effects on it. The qualitative characteristics of accounting information are the corner-
stone of starting point in financial analysis. The rest of modern analysis in advanced modern
systems depends on pre-formulated model that use this information either internally or ex-
ternally by investors or other parties.
There is a vast amount of information that can be attained by analysing and break-
ing down the financial statements. When analysing the financial statements of companies
a large number of financial ratios could be used, these ratios can be divided into several
groups and each group studies a certain phenomenon depending on the intended purpose of
the financial analysis for example, short-term debt holders focusing on the study of specific
percentages differ from the ratios that are focused on and studied by owners’ Long-term
debt, the financial ratios are divided into five categories that all highlight different aspects
of a company’s financial and operational performance. These categories represent measures
of liquidity, profitability, debt, operating and investment valuation. Each category is de-
scribed in detail shown below: Brigham (2005); Ross (1999).
 The Importance of Financial Ratios in Predicting Stock Price Trends... 17

Figure 1. Modern Approach to financial statement analysis

Source: researcher’s efforts.

2.1. Leverage (debit) Financial Ratios

This group of financial ratios show the percentage of a company’s capital structure that is
made up on debt or liabilities owed to external parties, also it focuses on a company’s ability
to meet its long-term debt obligations. Focusing on the long-term solvency in general, the
more leveraged and higher amount of debt financing relative to equity financing, the owner
faces then greater is the risk. Besides higher leverage is usually associated with higher
expected returns. The most common financial leverage ratios are the total debt ratios, the
18 Thomas Arkan

debt/equity ratio, the long-term debt ratio, the times interest earned ratio, the fixed charge
coverage ratio, and the cash coverage ratio.

2.2. Liquidity (solvency) Financial Ratios

The liquidity or solvency ratios group focuses on a firm’s ability (current assets and cur-
rent liabilities) to meet its short-term debt obligations. In other words, it lets you know
the resources available for a firm to use in order to pay its current obligation and expens-
es. If  a company cannot maintain a short-term debt-paying ability, it will not be able to
maintain a long-term debt-paying ability, nor will it be able to satisfy its stockholders. The
main ratio in this group is the current ratio and acid test ratio.

2.3. Financial Operation Ratios (Asset Efficiency) ratios

The Financial Operation Ratios group which is sometimes called asset management ratios,
measure the efficiency with which a firm manages and controls its assets (utilizing its capi-
tal) in generating sales and earnings. Investors can use these in order to analyse a company’s
or management’s ability to efficiently use resources and how effective it converts its pur-
chases and inventory to sales and then its sales to cash.

2.4. Profitability Financial Ratios

The profitability ratios group, also known as performance ratios, assesses the company
ability to earn profits on sales, assets and equity, it measures the return earned on a com-
pany’s capital and the financial cushion relative to each dollar of sales, These are critical to
determining the attractiveness of investing in company shares, and investors in using these
ratios widely, much like the operational performance ratios, these ratios give users a good
understanding of how well the company utilized its resources(assets) in generating profit
and shareholder value. The long-term profitability of a company is vital for both the surviv-
ability of the company as well as the benefit received by shareholders.

2.5. Valuation ratios (market value ratios)

The valuation ratios group indicates to the market value of a stock in terms of some meas-
ure of a company’s fundamentals such as EP, book value, EPS, ROE, and dividends. These
ratios are the ones that investors tend to look at on a daily basis and they change whenever
the price of the stock changes. These ratios allow you to compare your company to others
in your industry. They also allow you to compare different time periods of data for your
company to another one.
Table 1 shows each group of previous ratios and its sub-ratio in detail, its uses and for-
mulas.
 The Importance of Financial Ratios in Predicting Stock Price Trends... 19

Table 1
Main groups and sub-groups of financial ratios

Discussion Calculation Ratio

Grope 1: liquidity (solvency) ratios
Shows the company’s ability to meet Current Assets ÷ Current Liabilities Current Ratio
its current obligations (or pay off
debt).
This ratio eliminates inventory and Current Assets – Inventory – Prepaid Quick Ratio
other current assets from the deno- items ÷ Current Liabilities
minator, focusing on “near cash” and
receivables
Grope 2: leverage (debit) financial ratios
An indication of the ability of the Debt ÷ Total Assets Debt Ratio
company to absorb losses without
risking assets.
Direct comparison of debt to equity Total Liabilities ÷ Total Stockholders’ Debt to Equity
stakeholders and the most common Equity
measure of capital structure.
Short Term Liabilities ÷ Total Stoc- Short-term Debt to Equity
kholders’ Equity
Grope 3: Operation Ratios (assets efficiency)
Measures the efficiency of net fixed Sales ÷ Average Fixed Assets Fixed Asset Turnover ratio
asset (property, plant & equipment
after accumulated depreciation)
investments
Represents the overall (comprehensi- Sales ÷ Average Total Assets Total Asset Turnover ratio
ve) efficiency of assets to sales.
Grope 4: profitability Ratios
Shows the productivity of the com- Net Income ÷ Average Total Assets Return on Total Assets Ratio
pany in terms of its use of assets to
generate profits
Ratio shows how efficiently the com- Net Income available to Common Return on Equity Ratio
pany is using common shareholder’s Stockholders ÷ Average Common
equity. Stockholders’ Equity

This captures the relationship between (Sales – COGS) ÷ Sales Gross Margin Ratio
sales and manufacturing (or merchan-
dising) costs. (Also, called gross profit
margin.)
Net profit After Tax÷Net Sales Net Profit Ratio
Grope 5: Valuation ratios (Market value ratios)
Earnings per share Ratio (EPS)
Measure of accounting-based equity (Stock Price x Number of Shares Out- Market-to-book
standing) ÷ Total Stockholders’ Equity
Measure of market premium paid for Stock Price / EPS Price Earnings Ratio (PE)
earnings and future expectations
Equity or net assets, as measured on Total Stockholders’ Equity ÷ Number Book Value Per Share
the balance sheet of Shares Outstanding
Source: research collection from various references listed in bibliography.
20 Thomas Arkan

The usage of financial ratios has several limitations.

First: the fairness of accounting information to a large extent, an external analyst relies
on the fairness of published financial statements by the firm’s. Consequently, the informa-
tion which is obtained from this ratio is constrained by the quantity and accuracy (quality) of
the data contained in the published reports. In short, his analysis inherits all the shortcom-
ings and defects contained therein. Some specific problems include:
(1) Inadequate disclosure.
(2) Lack of comparability.
Second: the poorness of prediction: the predicted future financial statements reflect past
events of performances. There are a lot of restrictions and boundaries for this estimation,
future decisions concern past events and if they would be useful for such a credit analysis
but most of the future behaviour of specified variable such stock prices would be affected by
another variable either fuzzy variables or non-controllable variables.
Third: the lack of giving answers: ratios are not ends in themselves although this point
is most frequently overlooked by the novice analyst. Ratios raise the important question
of “why?” For example, if they indicate declining firm profitability the analyst needs to
know why is it that profitability declined. Once that is when the answers to this question
give a sounder position to determine whether the condition will continue in the future and
how it will affect investment decisions. Thus ratios do not give yes/no, black/white or type
answers. They are attention directing and not problem solving. Hence it is necessary to look
behind the ratios. It is the interpretation of the ratios which is most important.

2. Stocks and prices

Stocks are the most common and actively traded securities in financial markets, it is re-
garded as a long-term source of funding, Stocks (shares) give the holder the right to receive
profit in the case of an entity to achieve profits (or bear the loss as much as shares , and the
right to own part of a company and entitles this right of management both through its mem-
bership in the general assembly of shareholders or by the Board of Directors, therefore the
stock price rises whenever the profit distributions happen as cash based or of another type.
Investopedia (2016) define stocks as a type of security that signifies ownership in a cor-
poration and represents a claim on a part of the corporation’s assets and earnings. There are
two main types of stock: common and preferred. Common stock usually entitles the owner
to vote at shareholders’ meetings and to receive dividends. Preferred stock generally does
not have voting rights, but has a higher claim on assets and earnings than just shares. For
example, owners of preferred stock receive dividends before public shareholders and have
priority in the event that a company goes bankrupt and is liquidated.
Through the previous definitions it can be seen that there are several characteristics of
the stock (shares) including:
–– the per share in the capital of the enterprise,
 The Importance of Financial Ratios in Predicting Stock Price Trends... 21

–– the ability to share trading,

–– the limited liability afforded to the holder of the stock by its share in the capital or
equity,
–– equality to the value of the stock for the same facility.
Studying the movement of stock prices and the volatility of prices is considered to be the
most important mission in the financial world and markets many researchers since the last
century have tried to identify the factors affecting the price of stock, which was behind the
change in the price, and trying to study these factors and interpretations in order to take ad-
vantage of it to know the impact on stock price, for example investors are very interested in
the stock’s price because the price is one of factors that affect the sale or purchase decision,
there are many factors that can impact on the stock price in financial markets, which varies
in terms of power and could have an influence from factor to another and from market to
market and by a time series. These factors could be presented as:
1. Book value of stock.
2. Profits realized per share of the basic determinants of the price of the share’s profit-
ability.
3. Dividends at the end of each year.
4. Expectations about the future of the facility and the strength of its financial position.
5. General economic conditions of the country.
6. Rumours in financial markets.
7. Supply and demand situation on stock in the financial market.
8. Interest rate.

3. Research methodology and results

This study will be achieved in the Kuwaiti Stock Market which is an example of an emerg-
ing market because most of the previous studies were conducted in developed countries15
companies in three sectors selected from the listed company in the Financial market for the
years between 2005–2014. Statistical analysis was used to test the main and Sub hypothesis
which concentrated on finding the relationship and predictability power of each ratio in
estimating stock price trends, by using the SPSS Software at 0.05 confidence level. Also
a goal was to find an equation that could explain the relationship between dependent vari-
ables (financial ratios) and independent variable (stock price), a multiple regression analysis
used to achieve this mission, a stepwise method in the analysis was used to reveal only the
variables which significantly affect the dependent variable.
The Main hypothesis of this article is to find out whether there is a statistically sig-
nificant correlation between the financial analysis ratios as dependent variables (in 5 main
groups of ratios) and trends of stock prices. A sub-hypothesis builds on inverse assumption
for each ratio in the sector.
22 Thomas Arkan

Table 2 shows the results of a Statistical test of the study sample which is divided into 3
sectors: industrial, services and financial.

Table 2
Statistical analysis for dependent and independent variables for the sample test

Correlation analysis between dependent and independent variables in the model for different Sectors
Sectors Industrial Com Services Com Investment Com
Ratios/statistics r r2 Sig r r2 Sig r r2 Sig
Current Ratio –0.5 25.08 0.013 –0.323 10.41 0.083 0.779 60.6 0.00
ROA 0.679 46.19 0.00 0.404 16.24 0.0391 0.483 23.29 0.017
ROE 0.809 65.21 0.00 0.394 15.43 0.044 0.465 21.74 0.0191
Net Profit % 0.74 54.67 0.00 ---- ---- ---- ---- ---- ----
Short T Debt/Equity 0.738 54.26 0.00 0.274 7.51 0.122 –0.407 16.51 0.039
Assets Turn over 0.248 6.1 0.148 –0.376 14.11 0.056 ---- ---- ----
Current Assets Turn over 0.252 6.32 0.144 –0.009 0.011 0.488 ---- ---- ----
Fixed Assets Turn over 0.836 69.67 0.00 –0.0456 20.72 0.023 ---- ---- ----
EPS 0.188 3.5 0.216 0.531 28.19 0.009 0.469 21.92 0.0191
Share Market V/ Book V 0.91 82.6 0.00 0.859 73.54 0.00 0.984 96.68 0.000
P/E –0.349 12.11 0.067 0.421 17.65 0.034 0.151 2.241 0.272
Book V per Share 0.819 66.97 0.00 0.526 27.65 0.0091 0.476 22.61 0.018
Total debits/equity ---- ---- ---- ---- ---- ---- –0.338 11.4 0.074
Contribution Margin % ---- ---- ---- 0.415 17.13 0.035 ---- ---- ----
Correlation statistically significant at 0.05.
Source: research findings.

From the Table 2 the statistical analysis results can be seen below:
1. Industrial sector companies
There is no significant statistical positive relation between current ratio and stock price
where Sig (0.013) is less than the confidence degree at (0.05). The correlation is negative at
(0.5), the R2 (25.08) which means the independent variable (current ratio) was able to ex-
plain only 25.08% from the behaviour of the dependent variable and (74.92%) of the stock
trend affected by other variables.
There is a significant positive relationship between ROA and stock price at R (0.679) and
Sig (0.00), where R2 (46.19%) which explains also a wide range of stock trends.
Also there is a positive significant relationship between ROE and stock price where this
variable was able to explain (65.21%) of stock price behaviour in the market.
Also there are significant positive relationships between each of the net profit ratios,
current debt to equity ratio, fixed assets turnover ratio, market to book value ratio and book
value ratio with stock price trend approved by a degree of the calculated Sig compared with
the degree of confidence (I depend on it in the analysis).
 The Importance of Financial Ratios in Predicting Stock Price Trends... 23

The other ratios did not show a significant relationship between ratio and stock price
such total assets as turnover, current assets turnover ratio, EPS and P/E ratio. The correla-
tion of these factors with stock price was weak and its ability to explain stock trends was
poor also.
By using SPSS software with Stepwise method shows only independent significant vari-
ables (ratios) that have an effect on stock price behaviour in the multiple regression model to
get an equation presents the relationship between dependent and independent variables the
results reveal that only market to book value ratio and book value ratio have a strong cor-
relation with stock price at R (0.99 ) and R 2 (99.2%) with the variance analysis of regression
of the F (1040.1) and Sig (0.00) which refer to a positive significant relation between these
dependent variables and stock price. The T-test shows values of {(–18.402), (26.2) and 18.8)}
for constant, X1 and X2 respectively. The estimated equation to predict stock price for this
sector are:
Estimated stock price = –1.86 + 1.7x1 + 1.18x2,
where:
x1 .– .market to book value ratio,
x2 .– .book value ratio.

2. Service sector companies

The analysis of the results in the service sector shows that each of the current ratio, short
term liabilities ratio, total assets turnover, fixed assets turnover and current assets turn- over
do not have a significant relationship with stock price behaviour. The Sig Value did not pass
the confidence degree according to the main hypothesis. The ability of this independent
variable to explain the trends of the dependent variable was too poor.
The dependent variable of ROA, ROE, net profit ratio, EPS, market to book value/E ratio
and book value ratio have a positive significant relationship with stock price trends.
The multiple regression equation that could estimate the trend of stock price in this sec-
tor could be presented below where the mostly effected variable in stock price by applying
the STEPWISE method was the market to book value ratio, PE ratio, short term liabilities
ratio and net profit ratio, with a multiple correlation at (0.995) and R 2 (98.4). the F-test shows
(251.8) At Sig (0.00) which refer to a high significant relationship with the independent vari-
able, the T-value of independent variables was {(0.004), (24.3), (–6.5), (–4.8,3.3) and (3.3)}
respectively, the estimated equation to predict stock price for this sector are:
Estimated stock price = 0.002 + 1.9x1 – 0.02x2 – 0.95x3 + 2.05x4,
where:
x1 . – .market to book value ratio,
x2 .– .PE ratio,
x3 .– .short term liabilities to equity ratio,
x4 . – .Net profit ratio.
24 Thomas Arkan

3. Investment sector companies

The results show significant positive variables (current ratio, ROA, ROE, EPS, market to
book value ratio and book value ratio) with stock price, each variable with the Sig value less
than a degree of confidence approve acceptance of the null hypothesis. This variable shows
a positive correlation with stock price and the degree of explaining of the behaviour of stock
in the market was a high.
Each of the short term liabilities to equity ratio, debit to equity ratio and EPS ratio did not
show any significant relationship with stock price trend as a dependent variable. The value
of Sig was greater than the degree of confidence dependent in this test. The correlation be-
tween these ratios and stock price was either too poor or negative.
The aggregation of the affected variables to create an estimate equation for stock price
trend shows that only the market to book value ratio, EP ratio; ROE and EPS have a sig-
nificant relationship with the multiple regression analysis. The R value was (0.997) and R 2
(99.89%). With the analysis of variances of regression, the F-test value was (3150.8) And Sig
(0.00). The T-test for each variable was {(–4.156), (98.5), (8.1), (–6.1)} respectively. The es-
timated equation for predicting stock could be presented as follows:
Estimated stock price = –1.42 + 1.15x1 + 8.3x2 + 9.3x3 – 1.2x4,
where:
x1 . – market to book value ratio,
x2 .– PE ratio,
x3 .– ROE ratio,
x4 . – book value ratio.

Conclusions
From the practical side and hypothesis test I can conclude some important points that can
be seen below:
1. The new approach of the financial analysis had passed the old criticism to the func-
tion of it. The approach focusing on the integrity between accounting as an informa-
tion system (qualitative characteristics of accounting information), tools of analysis,
internal and external environment. The modern approach relay on the integrity be-
tween accounting, maths, and statistics to get the desired goals.
2. Top management, financial analysts and investors can rely on a specified set of fi-
nancial ratios in their evaluation for each financial and operational performance of
companies and when making decisions.
3. To perform a financial analysis process in an accurate and prices way which is desired
by investors and analysts, it requires the presence of multiple criteria to measure per-
formance and compare the results by others in the same sector.
 The Importance of Financial Ratios in Predicting Stock Price Trends... 25

4. The results of the financial ratio analysis with statistical methods shows that the prof-
itability ratios group and valuation ratios group have a significant effect on stock
prices. The combination of the financial ratios enhances stock price predictability.
5. In the industry sector for Kuwaiti companies in the financial market, the power ability
of financial ratios to predict the stock price trend was tested using a statistical analysis
with a multiple linear regression for the years between (2005–2014), 12 financial ra-
tios were tested, the test results showed that there were (2) variables (market to book
value and book value ratio) have a statistically significant stock price and thus can
identify the model to predict the price of the share of the industrial sector.
6. In the services sector also a 12 financial ratio was tested for the years between (2015–
2014), only 4 ratios passed the test that would affect the prediction of the stock price.
A market to book value ratio, PE ratio, short term liabilities to equity ratio and net
profit ratio have the most power influence in the prediction equation.
7. In the investment sector the market to book value ratio, EPS ratio, ROE ratio and
book value ratio were found a most effective variable in predicting the future value of
the stock price prediction equation.
8. This study was compatible with some universal studies in its analysis and the results
found out that there is a common ratio between our study and others that would have
an affect stock price prediction and influences such a market to the book value ratio,
book value ratio, ROE, PE, EPS and Net Income Ratio.

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ZNACZENIE WSKAŹNIKÓW FINANSOWYCH W PRZEWIDYWANIU TENDENCJI CEN

AKCJI: STUDIUM PRZYPADKU DLA RYNKÓW WSCHODZĄCYCH
Streszczenie: Celem niniejszego artykułu jest zbadanie znaczenia wskaźników finansowych obliczanych
na podstawie sprawozdań finansowych w przewidywaniu tendencji cen akcji na rynkach wschodzących.
Przeprowadzono badanie statystyczne mocy predykcyjnej 12 wskaźników finansowych na podstawie danych
z 15 spółek rynku finansowego w Kuwejcie reprezentujących 3 sektory w okresie 2005–2014. W celu osza-
cowania ceny akcji w danym sektorze, dla każdego z nich skonstruowano odrębne równanie z wykorzysta-
niem modelu regresji wielorakiej, eliminując zmienne nieefektywne za pomocą metody STEPWISE. Wyniki
pokazały, że niektóre wskaźniki wykazują silnie dodatnie i istotne związki z zachowaniem się cen akcji
i tendencjami w zakresie ich kształtowania się, przy czym najbardziej efektywne w sektorze przemysłowym
okazały się wskaźniki: ROA, ROE oraz zysk netto. Podobnie rzecz przedstawiała się w pozostałych dwóch
sektorach, usług i inwestycyjnym, gdzie najbardziej efektywne były wskaźniki: ROA, ROE, P/E oraz EPS.
W badaniu stwierdzono, że – przewidując ceny akcji – w każdym sektorze można opierać się na zestawie
wskaźników finansowych; inwestor może polegać na analizie finansowej przedstawionej za pomocą wskaź-
ników finansowych przy podejmowaniu decyzji finansowych i operacyjnych.

Słowa kluczowe: wskaźniki finansowe, cena akcji

Citation
Arkan T. (2016). The Importance of Financial Ratios in Predicting Stock Price Trends: A Case Study in Emerging
Markets. Finanse, Rynki Finansowe, Ubezpieczenia, 1 (79), 13–26; www.wneiz.pl/frfu.

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